No Economic Recovery For Businesses In 2008, Says Euler Chief Economist

The U.S. economy continues to face deteriorating economic conditions which will cause significant difficulties for businesses through the remainder of 2008, according to analysis from leading B-to-B accounts receivable insurer Euler Hermes ACI.

“The combined forces of soaring energy prices, the lagged effects of the Fed tightening into 2006, a depression in the housing market, and difficult credit conditions have been working against the economy for some time,” said Euler Hermes ACI Chief Economist Dan North. “While a recession has yet to be declared by the National Bureau of Economic Research, current conditions seem to match the NBER’s definition: ‘A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.’”

In looking at each variable, North said the evidence exists to support the recessionary claim. “Real GDP has been positive over the past two quarters, but without the single bright spot of the economy – net exports – GDP growth would have been -0.4% in 4Q07 and 0.1% in 1Q08,” he explained. Real income has also held up, but real wages have been falling on a year-over-year basis for six consecutive months. Non-farm payrolls have shrunk for four consecutive months, and “are likely to shrink for a fifth month, depending on Friday’s employment report,” North said. Industrial production has fallen two out of past three months and is up only 0.2% on a year-over-year basis. Real retail sales on a full year basis have been down for six consecutive months, both with and without autos and gas. “Certainly this data suggests recessionary conditions,” he stated.

In addition, North pointed to gasoline prices, which have reached an inflation-adjusted record high of almost $4 per gallon. As a result, highway vehicle miles driven have declined on a year over year basis for five consecutive months, most recently setting a record of -4.3% in March. “When Americans drive less, they also stimulate less economic activity elsewhere,” said North. “The last time highway vehicle miles driven fell was during the 1979 – 1980 energy crisis, and the only other time before that was the 1974 energy crisis. Both of those events accompanied recessions.”

Even the Federal Reserve Bank recognizes the deterioration of the economy, he said. The minutes of the Fed’s April 29-30 meeting forecast “…a contraction of real GDP in the first half of 2008…” And in a June 3rd address to the International Monetary Fund, Fed Chairman Bernanke said “…growth risks will remain to the downside." However, North explained that the Fed has also indicated that it expects its monetary policy actions to be effective going forward and that inflationary risks have emerged, clearly signaling that the current cycle of monetary easing is at, or nearing an end. In response, the U.S. dollar has firmed somewhat, gaining 3.6% against the euro from its record low on April 22nd. “One possible scenario going forward is that weakness in the U.S. economy will spread to Europe later this year, forcing the European Central Bank to cut interest rates and boost the U.S. dollar even more,” he said. “If that scenario develops, the dollar will likely rebound sharply since it is highly undervalued.”

North concluded, “Forces causing recession and difficult business conditions have been in place for some time now, and an abundance of data highlights the downturn. This will cause significant difficulties for businesses into 2009.”

Euler Hermes ACI is North America’s oldest and largest provider of trade credit insurance and accounts receivable management solutions and is the US subsidiary of the Euler Hermes Group. Headquartered in Owings Mills, MD, the company protects and insures more than $150 billion in US trade transactions annually. Additionally, Euler Hermes ACI provides a suite of receivables management services that includes commercial third party collections, receivables management outsourcing, and international collections. For more information, visit www.eulerhermes.com/usa.

Euler Hermes is the worldwide leader in credit insurance and one of the leaders in the areas of bonding, guarantees and collections. With 6,000 employees in 51 countries, Euler Hermes offers a complete range of services for the management of B-to-B trade receivables and posted a consolidated turnover of 2.099 billion euros in 2007.